Incompatible Infrastructure

It is one thing to claim superiority over competing nations & quite another when a real comparison is drawn about who stands where.

BY DANFES

There is no denying the fact that India & China are two of the brightest & the best spots for the business world to wager their bets on. Chances are that they would end up on the winning side. The sheer size, scope & potential presented by two of the largest economies of South Asia, which feature amongst the largest 5 in the world too, can only be well comprehended. Thus any amount of global interest in the two behemoths, the two mega markets of India & China is more than mere curiosity. Never before have such large economies with combined population of 2.4 billion grown so fast for so long that India is tipped to overhaul UK as the 5th largest economy of the world. Even when China is showing signs of a slowdown along with others like US, Germany, Japan & France, India continues to register an impressive GDP @7.4% for the 2nd year running.

It is baffling though that despite both the Asian giants having begun their reforms & liberalisation around the same time, China has stolen a march over its arch economic rival by way of an incessant network of highways, rails, roads, & industrial infrastructure. For the last two decades, both India and China have grown at twice the global rate. If this trend continues for next few decades, with their vast labour supply, favourable demographics and aspirations for reaching the developed world per capita income and consumption standards, these economies can be expected to have a significant impact on the world economy. A large number of studies on China and India focus on comparing sources of economic growth, poverty reduction and inequality issues, political structures, policy and institutional reform processes, trade, or foreign direct investment policies in these two economies. Infrastructure, with its critical input in this spectacular performance, remains in the background.

With 2019 elections round the corner & a muscular tug of war between two major political dispensations underway, it may well be worth analysing why India has lagged behind the dragon nation, when it faced similar set of challenges & capital market trends that its competitor nation had to encounter itself.The answer is in foreign direct investment & fund inflows required for infrastructure development. While China has been quite entertaining & rewarding for the global investors beginning 1975 or thereabouts, India acted wee too laggard in attracting such investments. Now that India has been aware of these trends and has made a concerted effort towards facilitating the flow of capital, it is about time that our leadership walked the talk. In order to provide the much needed impetus to the idea of “utilising global capital towards building Indian infrastructure”, we must follow a comprehensive & consistent policy agenda that course corrects the slowing down of infrastructure development. The core issues that need attention remain the same; local market funding to facilitate foreign capital inflows, a more efficient land acquisition strategy, and better linkages in policies across infrastructure segments and, to the extent possible, allowing market prices to prevail.

Maybe the authoritarian Chinese rule has made it easier for them to acquire public land for various projects. While in India there are terrible hurdles & hiccups orchestrated by trade unions, social activists & opposition parties related to such critical necessity. India needs to find a better solution towards providing local market credit to infrastructure projects to facilitate foreign capital inflows. For a capital provider, it is vital that local players partake in the risk-taking regarding infrastructure projects. While Indian banks have cut back from infrastructure lending, a complete pullback is not feasible given the size of the balance sheets that banks wield and given the infrastructure funding requirements. The key for banks is prudent risk management and effective project selection. Additionally, other local funding sources such as the National Investment and Infrastructure Fund (NIIF) and revamped Development Finance Institution type structures will be crucial.

The fundamental reason why local funding in infrastructure projects gives foreign investors greater confidence is that knowing local capital has “skin in the game” implies more protection for their money. Land acquisition remains a significant challenge for infrastructure creation. Recent bottlenecks that specific solar projects encountered getting access to land further elucidates this fact. The critical step here is to gradually tie-up land allocation and project allocation through the sector-specific agencies at work. Bundling project and land allocation implies that for instance, when solar tenders are allocated, the planning on the associated land required is done concurrently with the tender and not after the tender process. While the issue around land acquisition is complex, land is the most crucial component of infrastructure creation in possibly every segment. Therefore, urgent attention is due.

Co-operation within infrastructure segments, especially through policies that consider sectoral interlinkages is crucial for the infrastructure ecosystem to deliver value. Power generation adds value when transmission and distribution assets can assist in giving the power to end users. Bio-fuels can add value when the water required to generate the raw material for them does not impede other more critical water needs in an economy. Continually asking questions and ensuring that policy consistency is maintained across interlinked infrastructure sectors is the only way for infrastructure to indeed create value for all.While infrastructure assets vary significantly on the level of regulatory purview, it is essential that regulations are prudently used and do not stifle risk-taking and value creation. Asset returns need to be adequate to compensate for the risks involved to get both global and local capital to fund Indian infrastructure. Therefore, it is essential that greater focus is paid to tariff pricing, especially to the drivers of tariff rates. One size fits all solutions will lead to inefficient outcomes in the long-run. Now is the time to further push forward with policies that can help further facilitate the flow of capital into Indian infrastructure. It is also essential to realise that such changes are gradual, small iterations in the right direction can have significant positive lasting effects.